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In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate production of income by Y
In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate production of income by Y. Which one of the following statements is incorrect? (4 marks) A When A is greater than Y, there is disequilibrium and Y will tend to increase. B When A is equal to Y, there is equilibrium and Y will remain unchanged. C When A is less than Y, there is disequilibrium and Y will decrease. D When A is greater than Y, there is disequilibrium and A will decrease
Expert Solution
Whenever A is greater than Y, demand is more than supply and we have a disequilibrium. Production is increased and then equilibrium is determined. In case A is less than Y, production is reduced to reach A. When A is equal to Y there is no change required in Y. The excess of spending over production causes an excess demand which results to an increase in prices or output. In contrast, excess of production over spending causes decrease in prices.
So answer is option D.
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